Your Money: Pros and cons of reverse mortgage vs. home equity line of credit

Q. I don't get it. When people own their home, wouldn't it be more advisable to get a home equity line of credit or loan than a reverse mortgage? At least a HELOC is low interest (right now) and tax deductible! If anything happens to the owner — death, bankruptcy — the funds are deducted from the sale of the house. Right?
— Curious

A. Home equity borrowing of all kinds can be very beneficial, but it can also be a big mistake if you don’t plan carefully and fully understand what you’re getting into.

The major difference between a reverse mortgage and a home equity loan or line is that with a reverse mortgage, no payments are made by the homeowner while the homeowner remains in the home, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton.

Compare that to home equity loans, which are typically are amortized over a period of time whereby principal and interest is paid by the homeowner, he said. A HELOC requires interest to be paid for a period of time, and then at some point, both the principal and interest will be amortized.

Sure, the interest on most home equity borrowing is tax deductible, and that can be very valuable to some taxpayers — especially when you compare that borrowing to credit cards, which generally have higher rates and the interest is never tax deductible.

But borrowing against your home is more than just the dollars. For some seniors who consider reverse mortgages, it’s a matter of cash flow. Rather than paying back a loan against your home, reverse mortgagees don’t have to make any payments.

Hook offers this example.

"A $150,000 HELOC at 4 percent per year interest will cost the homeowner $500 a month in interest-only payments," he said. "The same reverse mortgage would require no payments while the homeowner remained in the house."

That $6,000 a year can mean a lot to someone on a fixed income.

"That being said a careful analysis still should be done to make sure that the reverse mortgage is appropriate even if no payments are required to be made," Hook said.

Indeed. If you’re considering a reverse mortgage, make sure to get the opinion of a money pro who will not benefit from you taking the product. That way you can better determine if you’re using the best strategy to leverage your home equity.